The Peruvian economist Hernando de Soto has had admirers on the American Right since the 1980s, when he wrote The Other Path, an analysis of how regulation and insecure property rights had driven much of his country’s economy underground. In the years since that book, de Soto has developed his ideas further — in 2000, he came out with The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else — and attempted to put them into practice in several poor countries through his Institute for Liberty and Democracy. He has also acquired a few new friends. Former president Bill Clinton, for example, regularly promotes de Soto’s work.
De Soto estimates that people in the third world and in ex-communist countries hold more than $9 trillion in what he calls “dead capital” — property that is owned informally, but not legally, and is thus incapable of forming the basis of robust economic development. He advocates the formal recognition of property rights in these countries as an indispensable prerequisite for liberal democracy.
In early March, I called de Soto to talk about the relevance of his ideas to Iraq’s future. As you will see, he was a model interviewee; I didn’t have to do much talking.
NRO: How important is the establishment of property rights in a post-totalitarian country such as [we're hoping postwar Iraq will be]?
HDS: It’s obviously crucial. If you want to create a market society, that’s what it’s based on. . . . [T]he starting point, the genesis of a market society is property rights because it relates to the issue of what belongs to whom. Once you determine that, you know who starts with what poker chips. And once people see that the law protects rights that they already have, then people begin to believe in the rule of law.
It’s not clear [in most poor countries] who owns what in terms of national records. . . . We’ve worked for example in Egypt. Now in Egypt it is not clear who owns 90 percent of all assets. In Mexico, 78 percent is not clear. Having a modern market economy is not possible. A market is all about the exchange of property rights. You have rights over debts, you have rights over money, you have rights over animals. Then you can trade with someone — you’re in Washington, someone is in California, but you can trade with confidence because you have [an established property-rights system].
Property rights makes the market possible. Once it’s established, the world of credit comes along. It makes investment possible. Because when people invest, they are giving money for a property right. I imagine that the Iraqis are in the same situation of Egypt. Investment is not possible and credit is not possible.
There is also a law-enforcement issue. . . . The reason you could find most of the 9/11 plotters was the records that are left on property-rights documents. But Osama bin Laden lives in countries where you have no property rights. Policemen call it skip tracing. Someone’s been murdered somewhere, so you find out who the neighbors are, all the apartments within four blocks, and the trail leads you to the murder. Skip tracing didn’t exist before property records.
So let’s go back. There’s no market without property rights. Second, no credit. Third, no investment. Fourth, no rule of law, no enforcement. And there’s no supplying of electricity: Who’s at the end of the wire, who do you bill? If it takes too long to figure out, it’s very costly.
So no property rights, no modern Iraq.
NRO: What effect would the establishment of property rights have on the Iraqi polity?
HDS: In the old days the requirement of property ownership for voting was necessary to avoid voting fraud. Because land doesn’t move. It pins you down, it fixes you. A polity is very difficult [to organize without property] unless of course you get a socialist-type government in which all rights to housing, etc., [are] organized and given by the state. Then you can have a polity but not a liberal one.
You can’t even have a national identification system. Most Western countries are in the habit of assuming that people can be located. Basically you know where everyone lives. Since I have lived in Europe, I wasn’t used to how they make polls in third-world countries. [He's talking about the equivalent of the Census — ed.] You’re told a poll is going to take place. They tell you not to move over the weekend, the streets are empty, you can only move with a special order, and people from the bureaucracy swarm out and ask questions. Six months after that you have a survey. You’ve never seen that and Europeans never see that.
The possibility of avoiding voting fraud requires pinning people down. Today the property-rights-as-basis-of-everything from your early history sounds very ideological. But it was practically important for records. This isn’t a simply ideological position.
There’s another reason as well. In the states all your records are continually updated. You open a phone book or you look at the records of the Chamber of Commerce — whatever records you want to look into — you’re Fannie Mae and want to do marketing. You automatically take for granted that those records are updated. Is that because someone at some data bank updates them? No. It’s [because] you and I make a deal. Our desires to have our rights protected are an incentive to keep the databases alive. Every time you change an address you record it.
So Greenspan can know how much money to issue. He knows how many transactions are taking place. So no property rights means there’s no incentive for people to keep the records updated.
NRO: Have representatives of the Bush administration talked to you about postwar Iraq?
HDS: I don’t want to be indiscreet. There has been a lot of interest recently. But if the question is have you been doing a model study to taking over the property system of Iraq, no.
Let me remind you, though, that that’s what MacArthur did. The first thing he did was set up a property system. It’s very poorly documented. I was very interested [in this] when we had an up and coming politician [in Peru] named Fujimori. Why did they come to Peru and why did the de Sotos not go to Japan? What happened was that after 1945, what MacArthur wanted to do [was] to give the peasants and the poor people and the citizens the title [to land] and take it away from the feudal class.
[At the same time,] Chiang Kai-shek was suddenly losing to Mao Tse-tung . . . and the reason, as MacArthur understood, was that Mao Tse-tung had begun to title. It was collective title, but that was still closer to [the peasants] than the feudal title.
So [the Americans] had a massive title and they spread wealth enormously and millions of Japanese had property. And now it’s nine times wealthier than Peru. So you’ve done that before.
When you went to war in Vietnam — Ho Chi Minh was also a titler. And the lessons that you learned in Japan you forgot in Vietnam. So they basically out-titled you.
NRO: Do property rights require constitutional protection?
HDS: I guess it depends very much on the country. Since for you Anglo-Saxons, a lot of the source of your law is the common law, which means that it is judge-made law, it might not be so important because property rights come simply because the courts have learned to protect it. But most of us in the rest of the world have what you might call Napoleonic or statutory or civil law. So I would say in Iraq and other places it’s very important to write it.